July 2010 Update – Mortgage Rate Outlook

In our continuing effort to provide the most useful information to mortgage shoppers across the country we set up our Mortgage Rate Outlook Panel that includes top financial experts providing their detailed commentary on the short term mortgage rate trends which “takes into account current market conditions on the day it is released”. This is the first month that a big surprise announcement has changed the fundamentals of our Panel’s decision, and we have decided to publish an update.

When our initial July Mortgage Rate Outlook was released on July 7th many economists were on the fence about whether the Bank of Canada would increase interest rates at their next July 20th rate announcement as there was more talk about a double dip recession than anything else. That all changed when Statistics Canada released their Jobs Report for June. The results were a shock to economists across the board. The number of new jobs created in June hit a staggering 93,200. To put it into perspective, this is almost 5 times higher than what most analysts were calling for and it means that we have largely recouping the job losses sustained in Canada during the recent economic meltdown.

These new jobs push our unemployment rate down 0.2% points to 7.9% . Making it the first time the rate has been below 8% since January 2009.

For those that warned of a double dip recession, some believe that the Jobs Report will convince analysts otherwise. Canada may well be out of the woods.

This is just the type of ‘new information’ that will quickly outdate any outlook or forecast, including our Mortgage Rate Outlook Panel. At the beginning of the month, 4 out of 5 of our panel members predicted that variable mortgage rates would remain level in July – now that doesn’t seem likely – and the Oulook for variable rates has been updated to ‘Up’.

July ’10 Panel consensus

Updated: July 14th

Fixed

Unchanged

Variable

Up

Economists had expected 20,000 jobs gains in June for Canada, and prior to Friday’s release roughly a 60% chance of a rate increase when the Bank of Canada meets next week. Now the odds are sitting at well above that.

All of the big banks are now predicting a rate hike, meaning that variable mortgage rates will go up. A rate increase of 0.25% will put the key lending rate at 0.75% , and likely raise the Prime rate to 2.75% .

Worries still exist about Europe’s debt troubles and a very slow recovery for the United States, but it seems that Canada is flying high enough on its own to justify higher interest rates.

“The latest jobs report is comforting for those who found work, but largely meaningless as an economic event. Half the positions were part-time. A good chunk of the full-time jobs fell into the nebulous ‘self-employed’ category. And this could be the G20 jobs effect at work – temporary positions as governments threw around $1 billion building fences and welding person hole covers.

It will require two or three months of boffo jobs data before fundamental views change. However, the Bank of Canada is looking for every excuse it can get to normalize rates. This is one.”

While another one Mortgage Rate Outlook Panel member, Dan Eisner, believes there is now a “60% chance” the Bank of Canada will increase rates now.

We hope this update will help those shopping for a mortgage in the next week and will publish an update on July 20th.

Other stats about the Jobs Report:

Employment increases were evenly split between full and part time in June.

Since July 2009, most of the employment gains have been in full-time work, up 355,000 or 2.6% , while part-time work rose by 1.5% .

Virtually all of June’s employment gains were in Ontario (+60,000) and Quebec (+30,000).

There were job declines in Newfoundland and Labrador and New Brunswick.